Consolidation among independent broker-dealers is inevitable, according to Cetera Financial Group chief executive Valerie Brown, and the inability or unwillingness of firms to stay open is benefiting her firm.
About 10% of the total number of broker-dealers have closed over the past five years, according to the Financial Industry Regulatory Authority Inc.
And it is small broker-dealers that have borne the brunt, with more and more being forced to shut down due to problems keeping up with the costs of technology and compliance. But Ms. Brown has said that midsize firms — those with $50 million to $100 million in revenue — also are vulnerable to those pressures, and she has proved prescient.
Still, some midsize firms are doing well — especially those that are absorbing smaller independent broker-dealers and registered investment advisers.
Multi-Financial Securities Corp., a unit of Cetera, took advantage of the pressures on smaller B-Ds this month by entering into a recruiting agreement with Pacific West Securities Inc., which announced it would close by March 1 due to thin margins and the high cost of doing business. With about 290 affiliated registered representatives, Pac-ific West was on target to generate $54 million in fees and commissions this year, its executives said.
One of the factors driving the mergers is the entrance of private-equity funds to the market, Ms. Brown said. This year, private-equity firms bought top-ranked RIAs such as The Mutual Fund Store LLC and leading independent broker-dealers such as First Allied Securities Inc.
“The private-equity guys are interested in deals that are worth their time,” Ms. Brown said. “I honestly think there's more potential for that next year, particularly for firms that need more equity or are spun off from a large corporation.”
Ms. Brown, 55, certainly knows firsthand about private-equity firms' interest in independent broker-dealers and RIAs. The three firms that comprise Cetera Financial — Financial Network Investment Corp., PrimeVest Financial Services Inc. and Multi-Financial — were acquired in 2010 by private-equity firm Lightyear Capital LLC from ING Groep NV.
Combined, those three make up one of the largest broker-dealer networks in the industry, with $636 million in gross revenue last year and close to 5,000 affiliated reps and advisers.
Ms. Brown said she expects to recruit reps and advisers next year. Her former boss, John Simmers, former chief executive of its predecessor, ING Advisors Network, said that the B-Ds in Cetera are poised for growth.
In particular, Multi-Financial is positioned to compete well with firms that recruit substantial brokers, such as LPL Financial LLC and Cambridge Investment Research Inc. Likewise, PrimeVest competes well in the financial institutions marketplace for brokers who want to work in a bank branch or credit union, Mr. Simmers said.
Cetera “appears to be around the deals that are going down, and they appear like they don't want to overpay for something,” Mr. Simmers said.
Cetera will continue to expand its platform next year, and roll out new social-media and marketing programs for its advisers.
But, as with all executives in the securities industry, Ms. Brown will face a number of obstacles next year, many of them unforeseen.
She cited continued market volatility, significant unknowns when it comes to actions by regulators and a political environment in an election year that could leave many regulatory issues unresolved.
“That could all create uncertainty in the marketplace, but the opportunity [for Cetera] is that smaller broker-dealers could hook their wagon to a bigger organization,” she said.
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